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BPP Revision Kit Q43, 44
ELITE LEISURE (E.L) – CBE Style OTQ case
Scenario:
E.L is a private limited liability company that operates a single cruise ship. This ship was acquired on 1 October 20W6. Details of the cost of the ships’s components and their estimated useful lives are:Component Original Cost Depreciation Basis
$m
Ship’s fabric (hull,decks etc) 300 25 years straight-line
Cabins & entertainment area fittings 150 12 years straight-line
Propulsion system 100 Useful life of 40,000 hoursAt 30 September 20X4 no further capital expenditure had been incurred on the ship.
The measured expired life of the propulsion system at 30 Sep 20X4 was 30,000 hrs. Due to the unreliability of the engines, a decision was taken in early October 20X4 to replace the whole of the propulsion at a cost of $140 million. The expected life of the new propulsion was 50,000 hours & in the year ended 30 Sep 20X5 the ship had used its engines for 5,000 hrs.
At the same time as the propulsion system replacement, the entity too the opportunity to do a limited upgrade to the facilities at a cost of $60million and repaint the ship’s fabric at a cost of $20 million. After the upgrade of the facilities it was estimated that their remaining life was 5 years (from date of upgrade). For the purpose of calculating depreciation, all the work on the ship can be assumed to have been completed on 1 October 20X4. All the residual values can be taken as nil.
Question 43: What is the amount of depreciation that should be charged in respect of the propulsion system for the year ended 30 Sep 20X5?
Answer 43: $14m (140m x 5,000/50,000)
I cannot understand the 5,000 is the remaining 5,000 or the 5,000 used out of the 10,000??
Question 44: Apart depreciation, what is the total charge to profit or loss for the year ended 30 Sep 20X5?
Answer 44: $45m (Repainting $20m + Loss on disposal $25m)
I cannot understand why the $60m is not included & how he gets the Loss on disposal figure of $25m.
This is from the question:
“The expected life of the new propulsion was 50,000 hours & in the year ended 30 Sep 20X5 the ship had used its engines for 5,000 hrs.”
So the depreciation of the new propulsion system was 5,000 / 50,000 x $140 million = $14 million
When they installed the new propulsion system in early October 20X4 they would scrap the old system so the fact that the old system theoretically still had 10,000 useful hours was re-estimated on the grounds of its unreliability
“Propulsion system 100 Useful life of 40,000 hours”
The old system originally cost $100 and had been used for 30,000 out of its estimated 40,000 useful hours
So accumulated depreciation up to September 20X4 would have been $75,000 and the system with a book value / carrying value of $25,000 was then scrapped … and that’s where the $25,000 comes from
“the entity too the opportunity to do a limited upgrade to the facilities at a cost of $60million and repaint the ship’s fabric at a cost of $20 million”
The upgrade is included as capital expenditure and will be depreciated over 5 years
The repainting of the ship’s fabric (I assume) does neither improve the earning capacity of the ship nor extend its useful life and is therefore expensed
Does that answer it for you?
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